Commentary

Housing is the forgotten crisis

Commentary: Falling prices once again threaten economy

WASHINGTON (MarketWatch) — The U.S. economy has made a lot of progress since the dark days of September 2008 — investors are happy, bankers are secure, markets are functioning and businesses are flush. No depression here.

But what about the rest of us? When does the recovery kick in?

The stock market has finally climbed back where it was on that fateful weekend when Lehman Bros. filed for bankruptcy, but there has been little relief for the average family.

For typical Americans, two things determine their financial well-being: Their job and the equity they have in their home. They get almost all of their income from wages and salaries, while most of their wealth is tied up in their house. When wages and house prices are rising, they are confident. When wages and house prices are falling, they are fearful.

Policy makers may have rescued the banks, but they haven’t figured out a way to bring back the jobs that were lost, nor have they found any answer to the problem that was the nucleus of the crisis: housing.

There’s been a lot of focus on employment in recent months by voters, politicians and economic analysts. The big question in Washington has been what can be done about the unemployment rate, which has been stuck near 10%. Hence the salesmanship of the two parties to market the tax bill as a way to create jobs.

But there’s been less attention paid to the other part of the family balance sheet: housing.

Building on a bubble

Housing is the forgotten crisis.

It wasn’t always so neglected. Early on in the downturn, the government dug deep into its policy tool kit to find answers for the collapse of housing.

They lowered interest rates in an effort to boost affordability. They took over Fannie Mae and Freddie Mac, and they told the Federal Housing Administration to lend freely. The Federal Reserve purchased more than $1 trillion in mortgage-backed securities and bonds to support housing. They approved tax credits for buyers, and extended those credits several times. They tried to get lenders to modify loans.

Nothing has worked. At least, not well enough. The housing market is still dead, and worst of all, prices are falling again.

For a while, it seemed as if housing was at least bottoming out, if not improving. The low mortgage rates and tax credits boosted sales, but only temporarily. And when sales fell back, so did prices.

Nationally, home prices are down about 30% from their peak. In some cities, such as Phoenix and Las Vegas, prices are down more than 50% from the high point, according to the Case-Shiller home price index.

According to the CoreLogic home price index, home prices fell 1.8% in September, the fastest decline since early 2009. Other price measurements tell the same story of falling prices since mid-summer. Recently, Fitch Ratings projected that prices would fall another 10% in 2011.

According to the Fed, the decline in home prices in the third quarter subtracted about $584 billion from the equity Americans have in their homes.

More trouble ahead

Since early 2006, American families have lost $7 trillion in home equity — more than half of their equity has simply vanished. Many millions, of course, have lost everything they put into their house, and more.

Years of blood, tears and sweat equity gone. Remember, for most families, home equity accounts for most of their wealth. In the past, wealth in the form of home equity has often been the ticket to upward mobility; many a small business or college education has been funded from real estate wealth.

About 11 million families — about 23% of those with mortgages — now owe more on their house than it’s worth. Before the bubble burst, that figure was about 1%. About 5 million families owe at least 25% more than what their house would sell for; they are so far underwater that it could take a decade or more to regain any equity.

Another 2 million families could go underwater if their house loses 5% of its market value.

The impact of that much lost wealth could be severe if it continues, but the most recent declines haven’t had any visible impact on the economy. Housing remains invisible.

Rising housing wealth helped drive consumer spending in the middle of the last decade. The best guess by economists is that consumers will spend about a nickel more if their housing wealth rises by $1, or spend a nickel less if wealth falls by a dollar. The bubble boosted consumption by about 6 trillion nickels. .

When prices started to fall in 2007, consumers cut back on their spending, which helped to push the economy into a deep recession. Lately, consumers have been spending more freely, but with prices dropping again, consumers might get tight-fisted.

The upper middle class and the rich, of course, haven’t slowed down. Spending isn’t as volatile for them as it is for the rest of us. Their holdings of stocks, mutual funds and other financial assets are worth more than their home equity, so they feel richer than they did a year ago.

Not so for those in the middle or bottom of the income scale, who have fewer financial resources to buffer themselves from economic shocks. For them, the recession never ended. And it might be getting worse.

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